GDP Growth Surges – Primarily Driven By Inventory Accumulation

Growth in GDP for the fourth quarter reached 5.7 percent at an annualized rate. This followed expansion of 2.2 percent in the third quarter and was the fastest rate of growth since 2003. Growth was generally widespread across different output components. Personal consumption grew 2.0 percent annualized compared to 2.8 percent in Q3 and business investment grew 2.9 percent annualized, the first improvement in over a year.

Despite these gains however, the jump was primarily due to a large improvement in business inventory accumulation. This was likely due to firms correcting over draw downs from prior quarters. Therefore this acts as a temporary effect, and the large gain in Q4 could act as a drag on growth in coming quarters as much of the inventory adjustment will have passed. Real final sales, which measures total consumption of output over the quarter grew at a lesser 2.3 percent. This is solid growth; however, it remains modest when in comparison to recoveries following past deep recessions where there usually occurs a fast “snap back.” It is yet to be seen what will occur in upcoming quarters; however, if real final sales do not continue to accelerate to a higher growth pace, then output expansion will remain at a level that will only modestly push down unemployment.